Accounting Practice Questions 1) The fundamental accounting equation states that: a) assets = liabilities + owner’s equity b) assets = liabilities + drawings c) assets = liabilities + net income d) assets = liabilities + net income – owner’s equity e) assets = liabilities - owner’s equity 2) If Net Income is $25,600, Gross Income is $32,505, and Revenue is $45,500 then: a) Cost of Goods Sold is $19,900 and expenses is $6,905 b) Cost of Goods Sold is $12,995 and expenses is $6,905 c) Cost of Goods Sold is $12,995 and expenses is $16,448 d) Cost of Goods Sold is $19,900 and expenses is $16,448 e) Cost of Goods Sold is $6,905 and expenses is $12,995 Explanation: COGS=Revenue- Gross Income Expenses=Gross Income – Net Income 3) Calculate the amount of simple interest that would be charged if $5,500 is borrowed for 3 years at an interest rate of 6%. a) $860 b) $900 c) $990 d) $1,080 e) $1,170 Explanation: $ 5,500*0.06= $330/year $330*3= $990 4) When Business X owes money to Business Y for supplies or materials purchased on credit, Business X calls this an: a) accounts receivable b) accounts payable c) asset d) interest account e) expense 5) An asset loses value over time through the process of: a) depreciation. b) deprecation. c) capitalization. d) appreciation. e) depression.
6) Unlimited liability means that: a) as many people as you want may be involved as customers. b) there is no limit to the amount of ownership. c) the owner’s personal belongings may be sold to cover the debts of a business. d) shareholders are responsible for corporation liabilities. e) shareholders may only lose the amount of their investment in a business. 7) ABC Company sells product Y for a price of $50 per unit. The fixed cost associated with product Y is $85 000 and the variable cost is $12.50 per unit. What is the quantity of product Y that ABC Company will need to produce and sell to break-even? a) 1,700 b) 2,267 c) 3,500 d) 6,800 e) break-even cannot be calculated Explanation: Let x be the number of units sold to break even 50x=12.50x+85000 37.50x=85000 x= 2,267 8) Assume you are reviewing a student budget you have prepared for yourself. You find that your ‘net income’ for each month is negative. Your best option to quickly reverse this situation is... a) Increase your expenses. b) Decrease your expenses and increase your income. c) Decrease your expenses and make strategic use of a credit card to build credit. d) Decrease your expenses. e) Decrease your expenses and work to get a student loan approved. Explanation: Since you are a student, it is normal to have a negative net income for each month. One way to have a positive net income is to cut back on your spending (expenses) and get a part time job to increase your income. 9) About 30% of Charlie's pay goes to income taxes and other government deductions. If he borrows $1 000 at 5% interest, roughly how much will he need to earn to pay it off in one year? a) $1,050 b) $1300 c) $1,500 d) $1,005 e) None of the above
Explanation: Total amount Charlie need to pay back=$ 1,000*0.05 =$1,050 Charlie Needs to Earn= $1,050/(1-0.3) = $1,500 10) Chris bought a hockey stick that regularly sold for $175. He received a 20 percent discount. How much did the stick cost before tax? a) $140 b) $205 c) $35 d) $125 e) $145 Explanation: Discounted Price= $175*(1-0.2) =$140 11) An example of a monthly variable expense for a household is: a) Rent b) Utilities c) Property tax d) House insurance e) Car payment Explanation: Utilities is an example of variable expense for a household because sometimes you use more heating in the winter than in the summer. Therefore Utilities changes from month to month depending on the weather. The other options in the question are considered a fixed expense because these expenses tend to stay constant. 12) If Net Income is $83,550, Gross Income is $98,700, and Revenue is $128,000 then: a) Cost of Goods Sold is 34.73% of Revenue and expenses are 11.84% of Revenue b) Cost of Goods Sold is 22.89% of Revenue and expenses are 11.84% of Revenue c) Cost of Goods Sold is 22.89% of Revenue and expenses are 28.81% of Revenue d) Cost of Goods Sold is 34.73% of Revenue and expenses are 28.81% of Revenue e) Cost of Goods Sold is 11.84% of Revenue and expenses are22.89% of Revenue Explanation: COGS %= (Revenue –Gross Income)/Revenue = ($128,000-98,700)/$128,000 = 22.89% Expenses %= (Gross Income – Net Income)/Revenue = ($98,700-83,550)/$128,000 = 11.84%
13) As the owner of a catering business, you are required to provide a quote for possible events. You have been asked to provide a quote for wedding for 200 people. You know it will cost $32.00 per person in raw materials, and estimate it will take 12 people to work an eight hour shift each. Each staff member is paid $15.00 per hour. The customer will also be renting 20 tables at $10 per table from you. How much should you quote if you want to make a 20% profit? a) $8,040 b) $9,648 c) $6,432 d) $10,420 e) $8,128 Explanation: Expenses Costs Raw Material Costs 32*200= 6400 Staff Cost 15*8*12= 1440 Table Cost 20*10=200 Total Expenses 8040 Quote= 8040*(1.2) = 9648 14) The financial statement that indicates how well the business has been doing over a period of time is called the a) balance sheet b) inventory sheet c) ledger statement d) income statement e) journal sheet 15) The amount that an asset is worth at the end of the lease is referred to as the a) face value b) operating value c) residual value d) lease value e) gross value
16) The financial statement that best demonstrates that a business has enough funds to meet its current obligations is a) a balance sheet b) an income statement c) a statement of shareholder's equity d) a statement of cash-flow e) these are all equally good 17) If assets total $375,000 and owner’s equity equal $125,000, then liabilities would total a) $500,000 b) $250,000 c) $225,000 d) $375,000 e) $125,000 Explanation: Liabilities= Assets-Owner’s Equity 18) What effect does a low inventory turnover have on a company? a) None, only the level of sales is important. b) Negative, inventory that moves slowly costs money c) Positive, low levels of inventory turnover indicates less holding costs d) Positive, low turnover indicates increased cash flow e) None, low turnover indicates lower assets on the balance sheet only Explanation: If a company has a low inventory turnover, this means that the company is not getting rid of their inventory fast enough. This will cost the company money due to holding costs. In addition, it might lead to possible write- offs of inventory due to obsolescence. 19) Pick the valid formula. a) Revenue – Fixed Cost = Profit b) Fixed Cost + Variable Cost = Gross Sales c) Revenue – Expenses = Profit d) Expenses – Profit = Revenue e) Revenue – Variable Cost + Fixed Cost = Profit 20) Business owners use income statements in order to: a) Increase assets b) Decrease liabilities c) Determine the amount of profit or loss d) Calculate the original owner’s equity e) Calculate if they should expand the business
21) The length of a fiscal period may be: a) 3 months b) a year c) 6 months d) a month e) any length of time Explanation: There are no regulations regarding to the length of a fiscal period. However, most companies’ fiscal period are either quarterly or yearly. 22) An item that will be used up or converted to cash during the fiscal year is: a) a current liability b) an expense c) a fixed asset d) a plant asset e) a current asset 23) The shareholders of a corporation elect: a) the executives b) the Board of Directors c) the employees d) the proxy e) the CEO Explanation: The shareholders of a company can only elect members of the Board of Directors. The Board of Directors represents the shareholders of the company. The Board of Directors has the power to appoint CEO of the company.
Figure 1 Statement of Net Income for the year ending December 31, 2011 Company A Sales Revenue Cost of Goods Sold Gross Margin on Sales
379,600 205,000 174,600
Advertising Expense Rent Expense Salaries Expense Telephone Expense Utilities Expense Total Operating Expenses Net Income
Company B $ $
159,740 104,000 55,740
15,200 32,000 103,000 7,350 10,550 168,100
4,853 10,700 30,600 1,175 3,125 50,453
24) By examining the Statement of Net Income (figure 1 above) for Company A and Company B, the reader can conclude that: a) Company A has a higher return on sales than Company B b) Company B has a higher return on sales than Company A c) Company A’s advertising is more effective in generating sales d) Company B’s advertising is more effective in generating sales e) Company A has a better telephone plan than Company B don’t understand this question.
Explanation: By looking at Company A and B’s financial statements, we can tell that Company A and B are two different size companies. We cannot compare the numbers in the Income Statement due to the different size of the companies. In order to determine which company is doing better, we need to calculate the Return on Sales Company A: 6,500/379,600=0.017 Company B: 5,287/159,740=0.033 25) Net Income can be found by calculating: a) Assets – Liabilities b) Liabilities – Assets c) Revenue – Expenses d) Expenses – Revenue e) Cost - Expense 26) About 25% of Zach's pay goes to income taxes and other government deductions. If he borrows $1,000 at 6% interest, roughly how much will he need to earn to pay it off in one year? a) $1,060 b) $1300 c) $1,410 d) $1,005 e) None of the above Explanation: Total amount Zach need to pay back= 1000*0.06 = 1,060 Zach Needs to Earn=$ 1,060/(1-0.25) = $1,413 27) Chris bought a iPad mini that regularly sold for $325. He received a 20 percent discount. How much did the iPad cost after tax (13 % GST)? a) $299.99 b) $325.00 c) $367.25 d) $260.00 e) $293.80 Explanation: Discounted Price= 325*(1-0.2) =$260.00 iPad cost after tax = 260*1.13 =$293.80
28) Which type of business has the greatest control over its expenses? a) Bakery b) Consulting c) Manufacturing d) Utility e) Airline Explanation: Airline and Manufacturing companies have high expenses due to the depreciation of their equipments. Utility companies cannot control their expenses very well because of the depletion of their natural resources and depreciation of their equipment. In addition, Bakeries cannot control their expenses very well due to the nature of their business. Therefore Consulting companies have the greatest control of their expenses out of all the options. 29) Account Receivable is a) Money owed by the company b) Computer accounts you have still to activate c) A company expense d) Money owed to the company e) Nothing important in business